The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

He was responsible for several of the engineering marvels of the late nineteenth century, including Blackwall Tunnel under the River Thames; the four tunnels under the East River in New York, built for the Pennsylvania Railroad; and Dover Harbor. Eventually, the empire he established would include everything from the Financial Times, the Economist, and Penguin Books to the investment bank of Lazard’s in London, as well as an oil-service company. But Mexico would provide the basis for the greater part of his fortune.

To the Americans, important interests and rights, including those of private property, were being attacked, and contracts and bargains were being broken. When Washington looked south toward Mexico, it saw instability, insecurity, banditry, anarchy, a dangerous threat to the flow of a strategic resource, and welshing on contracts. But when Mexico looked toward Washington and American oil companies, it saw foreign exploitation, humiliation, the violation of sovereignty, and the enormous weight, pressure, and power of “Yankee imperialism.” The oil companies, for their part, felt increasingly vulnerable and endangered, which led to reduced investment and a rapid retreat in terms of activity and personnel. The effects quickly registered on output, which plummeted, and Mexico soon ceased being a world oil power.

“Man is a strange being,” he replied, on Christmas Eve 1925, “and in spite of all disappointments he still starts every year with new hopes. So let us do the same.”

two formidable and not unrelated talents: one for gambling and the other, like Rockefeller and Deterding, for swift and complex mental arithmetic.

Despite the continuing efforts, the companies found it impossible to fashion an “orderly” and durable marketing arrangement with the Russians.

Weill reported afterward to Baron Rothschild.

There was great apprehension about international cartels in any industry and, especially, any show of camaraderie among the giants of oil. Yet these arrangements, outside the United States, did not run counter to the laws of various countries. On the contrary, both the temper of the time and the pressure of government policies, in addition to the business environment, pushed toward some form of collaboration and cartelization. Within the walls of each company that was a party to the agreements, the senior management would refer to the management of other companies as “friends”: “Friends in London say . . .” or “Friends not yet made up mind.” But it was not friendship that was at work, not a “brotherhood of oil.” Rather it was a sense of desperation in a depressed world economy and in the face of stagnant demand that really brought the oil companies together. They were aggressive competitors, and they never forgot that. The efforts at collaboration were paralleled by pervasive distrust, wariness, and deep-seated rivalry. Even as they were talking cooperation, they were plotting new attacks.

The Saudi dynasty had been established by Muhammad bin Saud, the emir of the town of Dariya in the Nejd, the plateau in central Arabia, in the early 1700s.

in 1927 they rose up in rebellion against him.

Simply put, Ibn Saud was fast running out of money.

IPC—Anglo-Persian

Those officers who had either closely observed or studied the German failure in World War I attributed that nation’s defeat to its economic vulnerability—its relative lack of raw materials and its inability to withstand the Allied naval blockade. Japan, they gloomily recognized, was far less well-endowed than Germany. Indeed, it faced a unique problem of supply. It was almost bare of the resource of oil. While petroleum held a relatively small place in the country’s energy mix—accounting for only about 7 percent of total energy consumption—its significance was in its strategic importance.

The Emperor expressed his regret that they had not seen fit to answer. He then drew a piece of paper out of his robe and read a poem by his grandfather, the Emperor Meiji:

Since all are brothers in this world, Why is there such constant turmoil?

pedagogic, and deeply analytical military strategist. He would sometimes spend hours a day by himself—in his own “mental oases,” as he called them—thinking through problems, searching for the key principles, laying out his plans.

The I. G. Farben

Monowitz

Since I deleted my notes the takeaways are that oil men were aggressive deal makers. The Near East and Libya as well as Russia, Venezuela and Mexico were important oil producers. During 2nd WW oil played a major role. It was a strategic commodity. Japanese and Germans were running weary low o not at times causing them to lose battles. Then after the IIWW oil producers started to make their own terms. There was a suez crisis in Egypt caused by some dictators.then the 70s crisis too. They took over the oil concessions and stations.

The new and very difficult problems of the developing countries put the oil exporters into an awkward, even embarrassing situation. After all, they, too, were developing countries, and they now proclaimed themselves as the vanguard of the “South,” the developing world, in its efforts to end the “exploitation” by the North, the industrial world. Their objective, they said, was to force a global redistribution of wealth from North to South. And, initially, other developing countries, thinking of their own commodity exports and overall prospects, loudly cheered OPEC’s victory and proclaimed their solidarity. And this was the time when “the new international order” was much discussed. But OPEC’s new prices constituted a huge setback for the rest of the developing world. Some oil exporters instituted their own lending and oil supply programs to aid other developing countries. But the main response of the exporters was to champion a broad “North-South dialogue” between developed and developing countries, and to insist on tying the oil prices to other development issues, with the stated aim of promoting that global redistribution of wealth.

In 1975, for instance, about 45 percent of what the Western European consumer paid for oil products went to his government, while about 35 percent was accounted for by the OPEC price. The other 20 percent went for shipping, refining, dealer’s margins, and so forth. The argument had less validity for the United States, where the tax component was only 18 percent, while the share going to the OPEC exporter was more on the order of 50 percent. In Japan, the government took 28 percent, with 45 percent going to OPEC.

Ahmed Zaki Yamani.

His voice was soft, forcing adversaries to strain and to be silent to hear what he said. He almost never lost his temper; the angrier he got, the more quiet he became. Flamboyant rhetoric was not his style. He went logically from point to point, dwelling on each long enough to draw out the essence, the connections, the imperatives, and the consequences. It was all so simple and persuasive and so overwhelmingly obvious and irrefutable that only a maniac or a simpleton could disagree. It was a manner of presentation that was mesmerizingly irresistible to many, and absolutely infuriating to others. Yamani carefully crafted his mystique; he was the master of patience and of the unblinking stare. When required, he would just look at his interlocutor, without saying a word, fingering his ever-present worry beads, until the subject was changed.

“In my public life, in my personal life, in everything I do I think long term,” he once said. “Once you start thinking short term, you are in trouble because short-term thinking is only a tactic for immediate benefit.” The Western world, he believed, was afflicted by the curse of short-term thinking, the inevitable result of democracy.

By nature, Yamani was also cautious and calculating. “I can’t bear gambling,” he said in 1975, when he was at his apogee. “Yes, I hate it. It rots the soul. I’ve never been a gambler. Never.” In oil politics, he insisted, he never gambled. “It’s always a calculated risk. Oh, I calculate my risks well. And when I take them, it means I’ve taken all necessary precautions to reduce them to the minimum possible. Almost to zero.”

Then in December of that year, the international terrorist known as “Carlos,” a fanatic Marxist from Venezuela, led five other terrorists in an attack on a ministerial meeting in the OPEC Building on Karl Lueger Ring in Vienna. Three people were killed in the first few minutes. The terrorists took the oil ministers and their aides hostage, and eventually embarked on a harrowing air journey, flying first to Algiers, then to Tripoli, and then back to Algiers, threatening all the way to kill the ministers.

Washington’s central objective was stability, and it campaigned hard against further price rises for fear that they would stoke inflation, cripple the international payments and trade system, and retard growth.

Nixon, Ford, and Kissinger

Iran had now joined Saudi Arabia on the side of moderation. With those two countries representing 48 percent of OPEC production, they could dictate to the other members, and oil prices would be held in check. Thus the battle between the Shah and the Saudis was ended. The Shah had been won over. Through the half-decade from 1974 to 1978, there were only two rather small OPEC-wide price increases: from the $10.84 set at Tehran in December 1973 to $11.46 in 1975 and to $12.70 at the end of 1977. But inflation was increasing at a more rapid rate, and as had been anticipated, eroding the real price. By 1978, the oil price, when adjusted for inflation, was about 10 percent below what it had been in 1974, immediately after the embargo. In short, by restricting the increases to those two relatively small ones, the real oil price was in fact lowered somewhat. Oil was no longer cheap by any means, but neither had the price, as many feared it would, gone through the roof.

William Knox D’Arcy’s bold and risky commitment to Persia in 1901.

50/50 split concept in the early 1960s to the present split of about 98 percent for the Government and 2 percent for the companies.” They hoped now to work out a satisfactory arrangement. But they were told, quite firmly, that Kuwait intended to take over 100 percent, that it was a matter of sovereignty, and that the question was not open to debate.

It was the ebbing of American power—the Romans retreating from Hadrian’s Wall. I tell you, I could feel it everywhere.” Then came the oil embargo, the price increase, Nixon’s humiliation and resignation, and the abrupt American withdrawal from Vietnam. And now Goodman found himself, in 1975, sitting in Kuwait City where the Kuwaitis were also insisting that an era had ended.

Was the Venezuelan oil industry, on which the government’s revenues depended, to be primarily a political entity, with its agenda set by politicians and the interplay of domestic politics, or would it be a government-owned entity that was run as a business, with a longer time horizon and with its agenda set by oil men? Behind that question, of course, was a struggle for power and primacy in post-nationalization Venezuela, as well as a battle over the future of the nation’s economy.

From the bleak years of the early 1930s, when the impoverished King Ibn Saud had been more desirous of discovering water than oil, Aramco had grown into a vast economic enterprise. In June of 1974, Saudi Arabia, operating on Yamani’s principle of participation, took a 60 percent share in Aramco.

Finally, late one night in the spring of 1976, they came to agreement in Yamani’s suite at the Al-Yamama Hotel in Riyadh. Forty-three years earlier in Riyadh, after Standard of California had reluctantly agreed to make an up-front payment of $175,000 for the right to wildcat in the trackless desert, Ibn Saud had ordered the original concession document to be signed. By 1976, the proven reserves in that desert were estimated at 149 billion barrels—more than a quarter of total free world reserves. And now the concession was to be disbanded once and for all. “It was truly the end of the era,”

Saudi Arabia had enough oil to last several lifetimes, while the four companies had the huge marketing systems required to move large volumes of that oil.

The oil producers had achieved their grand objective; they controlled their own oil. These nation-states had become synonymous with petroleum.

In the 1950s and 1960s, cheap and easy oil had fueled economic growth and thus, indirectly, promoted social peace.

one of the great lessons of the miserable decades between the two world wars was how central was economic growth to the vitality of democratic institutions.

French energy policy: rapid development of nuclear power, a return to coal, and a heavy emphasis on energy conservation—all

fines would be levied on the building management. But perhaps the most striking aspect of France’s overall energy conservation program, and an altogether French initiative, was the ban on any advertising that “encouraged” energy consumption.

The companies could not give away the kind of trinkets and premiums that gasoline stations habitually offered around the world—mugs, glasses, spoons, and decals. After all, such gifts would encourage consumption. Instead, about the only thing they were permitted to hand out were cheap tool kits, but only so long as they contained a brush for cleaning spark plugs to promote higher efficiency.

“Consumers look at this ad and say, ‘Oil companies are wasting a great deal of money on such ads, therefore the companies must be rich, therefore there must not be any energy problem, therefore it is all right to waste energy.’ ”

The companies’ profits were huge in absolute terms, but their rates of return were, except for 1974, somewhat below the average rate for all American industry.

Moreover, the flow of investment was redirected in a very substantial way. The number-one commandment was to avoid, at all costs, nationalism in the Third World. In any event, exploration in most of the OPEC countries was fore-closed because of nationalization, and there was a rather strong presupposition that, if a company had success in other developing countries, the fruits would be seized before they could be ingested, leaving only small pieces and bits for the company. So the companies redirected their exploration spending, to the degree possible, to the industrial countries of the Western world: to the United States, despite a growing pessimism about its oil potential, to Canada, and to the British and Norwegian sectors of the North Sea. In 1975, Gulf undertook a complete review of its global budget. Every investment dollar that was not nailed down and committed was quietly yanked out of the Third World and brought back to North America and the North Sea. By 1976, Royal Dutch/Shell was concentrating 80 percent of its worldwide, non-U.S. production expenditures in the North Sea. “After 1973 and nationalization, you had to go hunt your rabbits in a different field,” recalled an Exxon executive, “and we went to places where we could still obtain equity interests, ownership, in oil.”

circus.

The older the industry the more regulated it becomest

Alaska, Mexico, and the North Sea.

It was becoming clear that Mexico possessed world-class oil reserves. In 1974, the country started, in a very small way, to sell petroleum abroad again, though the export of oil was criticized by some as running against the tenets of Mexican nationalism. While production was rising, the engineers in Pemex continued to be very cautious in their estimates of reserves through the last years of the Presidency of the radical, nationalistic Luis Echeverría Álvarez. But matters changed with the election of a new President, José López Portillo, in 1976. López Portillo, who had been Echeverría’s Minister of Finance, inherited an economic crisis that was Mexico’s worst since the Great Depression. The Mexican economic miracle had run out of gas, the economy had stalled, the value of the peso had collapsed, and the country was regarded as a poor risk by international lenders. To make matters worse, the population was growing faster than the economy—one out of every two Mexicans was under the age of fifteen—and 40 percent of the workforce was either unemployed or underemployed. In the months before López Portillo actually took over, conditions were so bad that there were even rumors of a possible military coup.

Whereas Mexico had been a country to be avoided by international lenders through 1976, it now became one of the most active borrowers in the world. “Why the Bankers Suddenly Love Mexico” was the title of an article in Fortune. The reason, of course, was oil. “Every Tom, Dick, and Harry in banking is knocking on their door,” said the vice-chairman of Manufacturers Hanover Trust. One Mexican official was even chosen “borrower of the year” in 1978 by a New York financial newsletter. The title might well have been won by the whole country. There seemed to be no restraint: The Mexican government was borrowing from abroad, Pemex was borrowing, other state companies were borrowing, private firms were borrowing, everyone was borrowing from abroad. How much was being borrowed altogether? No one knew. But it didn’t seem to matter. Mexico’s credit, lodged in oil, was good. Or so the bankers and their Mexican counterparts thought. But one thing was certain: Mexico had become a major new force in the world oil market, as it had not been since the 1920s, and it would provide yet another significant alternative source of supply, undermining the OPEC Imperium.6

Toward the end of 1970, British Petroleum announced the discovery of oil in the Forties field, on the British side, one hundred miles northwest of Ekofisk. It was a huge reservoir. A series of major strikes followed in 1971, including Shell and Exxon’s discovery of the huge Brent field. The North Sea oil rush was on. The 1973 oil crisis turned the rush into a roar.

Altogether, the development of the North Sea was one of the greatest investment projects in the world, made all the more expensive by rapidly inflating costs. It was also a technological marvel of the first order.